The luck of the Canadians (and Mark Carney)


Stephanie Flanders reports from Toronto on a "financial rock star"

Before Mark Carney comes here as the next governor of the Bank of England, I thought I should go there, to get a closer look at his record in Canada, and decide for myself whether he's anything like as good as he's cracked up to be.

My conclusions? He didn't singlehandedly rescue the Canadians from the worst of the global financial crisis - he didn't really need to. But boy, did he win over the press.

Britain's press corps like to think they're more hard-nosed than their Canadian counterparts. Meaner. Less easily impressed.

Perhaps. But I've read what the Canadian press say about other Canadian policy makers, and I've read what they said about Mark Carney after five years in the hot seat at the Bank of Canada. It's like night and day. One paper put Carney at the top of its list of "Canadians abroad that we want back". Before he had even left.

I can't help thinking the hard men and women of Fleet Street might find themselves charmed as well. This is a man who established a reputation as a "working-class hero" to many Canadians, despite having spent 13 years at Goldman Sachs.

Then again, Canadians don't have nearly as much reason to dislike bankers. Canada is the only G7 country that has not had to spend any taxpayer money bailing banks out.

'Timely stimulus'

That is not strictly down to Mark Carney, though he had a role in improving bank regulation at the Bank of Canada and also during his time at the Department of Finance.

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Mark Carney was dealt a strong hand, but nearly everyone I spoke to in Canada still gave him credit for playing it well”

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But it is one of the things that made his job quite a lot easier, since the start of the financial crisis, than Ben Bernanke's or Sir Mervyn King's.

Canada's economy is nearly 5% larger now than it was five years ago. Britain's is more than 2% smaller. Inflation has also been a lot lower under Mark Carney: 1.7%, on average, versus 3.2% in the UK.

The OECD (Organization for Economic Co-operation and Development) says the Canadian economy bounced back so quickly from the 2008-09 crisis "thanks to timely monetary and fiscal stimulus, a sound financial system and high commodity prices."

You can't help noticing that only one of those four advantages is directly attributable to Mr Carney.

As I've discussed before, Canada's banks were conservative, going into the crisis. So were its financial regulators. Compared to their friends across the border, the big Canadian banks did not end up with a lot of bad debt - and the bad debts they did acquire, they had made much better provision for.

Mark Carney Mark Carney's Bank of Canada appointment surprised many

The fact that Canada is a big commodity producer and exporter also made a key difference: those big commodity price rises that have made us so much poorer in the past few years, by pushing up inflation, have largely been making Canada richer.

As we know, Canada was also helped by having got its fiscal crisis in early. The government spent most of the 1990s doing, in effect, what George Osborne is doing now. (Though the Canadians had the good luck to be doing it when everyone else was doing well. I'll return to Canada's good timing in a minute.)

Mark Carney

  • Born 16 March, 1965 in Fort Smith in Canada's Northwest Territories
  • Studied at Harvard and Oxford
  • Was reserve goalie for the Harvard ice hockey team
  • Speaks fluent French
  • Worked at Goldman Sachs for 13 years
  • His wife, Diana and their four daughters have dual British-Canadian citizenship

All that past austerity meant that Canada had a lot more room to turn on the taps, with a big increase in public investment and other stimulus policies which increased borrowing by more than 4% of GDP between 2008 and 2010.

That's twice the OECD average and much larger than Gordon Brown's rather feeble stimulus programme.

So - Mark Carney was dealt a strong hand. But nearly everyone I spoke to in Canada still gave him credit for playing it well.

I didn't know, before my trip, that he was a surprise pick for his last job as well. A few weeks before, 36 economists were asked who would get the job as governor of the Canadian central bank.

Nearly all thought it would be Paul Jenkins, the senior deputy governor and long-time insider (sound familiar?) Only three thought Mark Carney was in with a chance.

When he came in, he quickly made his mark by cutting interest rates by half a percentage point in his first month. That was in March 2008, remember, when other central banks still thought the financial crisis would blow over. The ECB was actually raising rates.

'Moment of truth'

That early rate cut helped make Mark Carney's reputation. He also gets credit for using "forward guidance" to convince people the central bank was serious about keeping policy very loose. There'll be plenty more to say on that subject, in the next few weeks.

But most other central banks did slash interest rates a few months later, also to record lows. The difference was that it worked in Canada - because the banks were willing and able to lend.

That produced a feel-good factor and a pretty reasonable economic recovery. It also produced a rocketing housing market, a big current account deficit, and rising household debt. So yes, he does have some experience relevant to the UK.

Debt to income graphic

Paul Krugman says this all makes Canada a test case for two somewhat different views of the financial crisis and its aftermath.

One view says that it was primarily down to the banks and their problems. If that's true, you'd expect Canada to stay out of trouble, for all the reasons I've already discussed.

The other view is that the banking crisis was just a sideshow for the main event which was the housing boom and bust and the long-term implications for the economy of households being stuck with so much debt.

I'm not sure anyone thinks any more that 2008-9 was "just" a banking crisis. For a Nobel prize winning economist, Paul Krugman has quite a weakness for straw men.

How does Mark Carney's reputation as a central banker stand up?

But when you look at what's happened to Canadian house prices and personal debt ratios, you do have to wonder whether Canada has simply postponed its moment of truth.

At this point, it's traditional for us "hard-nosed" UK economics journalists to joke that Mark Carney is "getting out of Canada in the nick of time". We'll see.

Maybe our new central bank governor is lucky as well as charming. But you'd have to say, it's lucky for Canada, too, if it has once again been able to postpone its day of reckoning, to a time when its neighbour and main trading partner is on the mend.

George Osborne isn't the only one wishing we could have been so lucky in the UK.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 146.

    I wonder how far Carney would stick his neck out & tell the chancellor that manufacturing must take priority, not shuffling bits of paper around, a return to the gold standard & investment in new technology such as solar energy which is cleaner, can be up & running more quickly than nuclear, desalination and better/smarter production of goods before he's sacked as Govt only want to screw ppl??

  • rate this

    Comment number 145.

    You forget another factor; tax framework &/or response.

    In1970s,80s&90s, the fiscal response was to tax the wrong things & to give the concentrations of financial power freedom in the hope - proved vain - that it would trickle down to the lowest levels.

    It never did. Even G.Brown's forced redistribution didn't really reach the lowest levels; it found its way into 3rd party pockets.

  • rate this

    Comment number 144.

    @139 The Capitalist
    The thing that saved the Canadian economy was several failures at rescuing their economy from ruin followed by a Govt determined to get it right. They set a schedule for cuts. They stuck to the schedule without exception. They finished on time on budget.

    When trouble struck in 2001, 2003 & 2007-2009 they were in a very strong economic position.

  • rate this

    Comment number 143.

    SF 'those big commodity price rises that have made us so much poorer in the past few years, by pushing up inflation, have largely been making Canada richer.'
    Think it was the Iraq War that did that. When Gulf 2 started, Iraq dropped out of the oil tables & haven't fully recovered. Then Canada discovered&recovered the tar sands oil and took their place for a while as no.3 producer.

  • rate this

    Comment number 142.

    Perhaps he will not cave to the Treasury as easily as seems expected?
    I for one whould Quantatively Ease money to citizens.After all if you can pluck money out of thin air just to keep a debt in business, just think the difference if each citizen was QEd a substantial sum just for them?
    They would spend it enjoying themselves and maybe not be depressed any more?For having money can bring happiness

  • rate this

    Comment number 141.

    Mervyn King said of all the monetary systems you could possibly create, we have created the worst. He also said that the problem we have had are all primarily related to maturity transformation. In simpler terms, giving commercial banks the ability to print money via long term loans on short term bank deposits. People need to start taking what he said seriously. End fractional reserve banking.

  • rate this

    Comment number 140.

    138 The Capitalist
    You overstate the significance of old Etonians. The country is run by grammar school meritocrats like Mervyn King and Gus O Donnell.

  • rate this

    Comment number 139.

    Having studied Canadian Banking Law for some 25 years it is clear that thePrinciples of Lending and CHMC policy saved the Canadian Banks.
    Unfortunately, Osborne and the Government do not understand Banking Principles of Lending. This is the reason that lending by banks is stagnant in this country.

  • rate this

    Comment number 138.

    Unfortunately, he does not stand a cat's hope in hell up against the 300 or so ex Etonians, and the Oxbridge cabal at the centre of the bank.
    He is a fall guy set up by Osborne.

  • rate this

    Comment number 137.

    You are correct, Krugman is the master of straw men. It will be interesting to see how Carney does over here with so little 'wriggle room.' Good luck to him.

  • rate this

    Comment number 136.

    @130 Alan
    Anything that stimulates the grey cells is a good thing as far as I am concerned.
    Hercule Poirot was always able to get to the "truth" no matter how hidden it appeared to be.
    And it does appear to be a mystery as to why we often are not able to sift through the chaff in order to get at the grain.

  • rate this

    Comment number 135.

    Its simply more jobs for the boys yet another chum of Dave and George. As for Mark Carney picked for the job due to his contribution to the success of the Canadian economy. Well as is also the case with Australia their economic success is largely down to both of those countries having huge natural resources and small populations not the sole actions of one particular central banker.

  • rate this

    Comment number 134.

    Wow Stephanie.

    Even after writing such an article you couldn't resist throwing in the odd graph .

    Plainly it does not mean anything.

    We are here and now.

    It is the job of the 4th estate to make politicians' whims come to fruition.

    That's all they are. Whims.

  • rate this

    Comment number 133.

    Firstly, goodbye and good riddance Mervyn King. Is it just me or did everyone notice that everytime we got good news and the Pound strengthened out came King with a comment to send it tumbling again. I hope Mark Carney starts posotive and injects the feel good facture, the opposit of doom and gloom King, then hopefully the Country will respond.

  • rate this

    Comment number 132.

    smoke and mirrors, Canada also had to bail out some of its banks for over zealous lending , but they relabeled the financial support under a different name. Household debt is high here too, house prices have quadrupled sine 2003 so its bubble time here too. Loads of oil sands but no way to get it to China or Europe, basically captive source for the USA. USA owns Canada.

  • rate this

    Comment number 131.

    Governor Carney will NOT question Osborne’s austerity policies, or limited banking reforms proposed by Vickers. On the contrary, it was to avoid any meddling that Adair Turner, (FSA) &&Lib Dem MEP Sharon Bowles, were rejected. Carney served Harper Govt in Canada, relentlessly trying to destroy what’s left of a welfare state & public sector.
    So, you have him; you can keep him.

  • rate this

    Comment number 130.

    I'm not "knocking" economics or economists. IMO it is a fascinating and useful subject to study and I'm eternally grateful that I did so.
    It teaches you to be literate AND numerate, stimulates the little grey cells, instils the importance of the efficient use of resources, and enables great versatility in career development.
    I recommend the subject to any young person.

  • rate this

    Comment number 129.

    127 Plotinus
    You have summed it up very well IMO.
    What did Geoffrey Howe say about economists?
    364 economists know 364 sex positions but don't know any women.
    I think he got that from a civil servant. (Possibly a classicist).
    In economics you always have to be mindful that however strongly you hold certain views you could be wrong or only partially right, assuming there is a right.

  • rate this

    Comment number 128.

    There is almost no causal connection between levels of government debts and recessions. It's just a myth.
    Recessions almost always come about because of some shock to the economic system.
    The 1970s twin shocks of commodity price boom and monetary expansions are good examples of the sort of shocks that cause governments to cut spending and force up unemployment.

  • rate this

    Comment number 127.

    @123 alan
    It seems to me that King's grasp of economics is certainly not in doubt. Of course economics is an inexact science (if it can be called a science at all) as there are many divergent economic theories. A further element is that he has had to do the job with his hands tied behind his back (i.e. within his narrow mandate) and with constant interference from politicians and other lobbyists


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